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Other

Noble Energy 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549 

 
FORM 10-Q

 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____

Commission file number: 001-07964
 
 
NOBLE ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
           Delaware
 
73-0785597
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)
     
100 Glenborough Drive, Suite 100
   
Houston, Texas
 
77067
(Address of principal executive offices)
 
(Zip Code)
     
(281) 872-3100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No x
 
As of July 8, 2011, there were 176,513,711 shares of the registrant’s common stock,
par value $3.33 1/3 per share, outstanding.



 
 

 
 
 
Part I.Financial Information
3
   
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
22
     
Item 3.
39
     
Item 4.
40
     
Part II. Other Information
40
   
Item 1.
40
     
Item 1A.
40
     
Item 2.
40
     
Item 3.
41
     
Item 4.
41
     
Item 5.
41
     
Item 6.
41
     
41
   
42
 
 
Part I. Financial Information
 
Noble Energy, Inc.
(millions, except per share amounts)
(unaudited)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues
                       
Oil, Gas and NGL Sales
  $ 895     $ 710     $ 1,725     $ 1,398  
Income from Equity Method Investees
    48       24       96       50  
Other Revenues
    11       17       33       36  
Total
    954       751       1,854       1,484  
Costs and Expenses
                               
Production Expense
    155       150       296       289  
Exploration Expense
    68       52       138       132  
Depreciation, Depletion and Amortization
    235       215       456       431  
General and Administrative
    82       63       165       129  
Asset Impairments
    131       -       139       -  
Other Operating (Income) Expense, Net
    (11 )     41       18       55  
Total
    660       521       1,212       1,036  
Operating Income
    294       230       642       448  
Other (Income) Expense
                               
(Gain) Loss on Commodity Derivative Instruments
    (143 )     (96 )     143       (242 )
Interest, Net of Amount Capitalized
    21       19       37       39  
Other Non-Operating (Income) Expense, Net
    (9 )     (13 )     -       (13 )
Total
    (131 )     (90 )     180       (216 )
Income Before Income Taxes
    425       320       462       664  
Income Tax Provision
    131       116       154       223  
Net Income
  $ 294     $ 204     $ 308     $ 441  
                                 
Earnings Per Share, Basic
  $ 1.66     $ 1.17     $ 1.75     $ 2.53  
Earnings Per Share, Diluted
    1.61       1.10       1.73       2.44  
                                 
Weighted Average Number of Shares Outstanding, Basic
    176       175       176       175  
Weighted Average Number of Shares Outstanding, Diluted
    179       178       178       178  
 
The accompanying notes are an integral part of these financial statements.

 
Noble Energy, Inc.
(millions)
(unaudited)

   
June 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
 
Current Assets
           
Cash and Cash Equivalents
  $ 1,527     $ 1,081  
Accounts Receivable, Net
    571       556  
Other Current Assets
    215       201  
Total Assets, Current
    2,313       1,838  
Property, Plant and Equipment
               
Oil and Gas Properties (Successful Efforts Method of Accounting)
    15,341       14,393  
Property, Plant and Equipment, Other
    278       263  
Total Property, Plant and Equipment, Gross
    15,619       14,656  
Accumulated Depreciation, Depletion and Amortization
    (4,751 )     (4,392 )
Total Property, Plant and Equipment, Net
    10,868       10,264  
Goodwill
    696       696  
Other Noncurrent Assets
    462       484  
Total Assets
  $ 14,339     $ 13,282  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current Liabilities
               
Accounts Payable - Trade
  $ 1,072     $ 927  
Other Current Liabilities
    430       495  
Total Liabilities, Current
    1,502       1,422  
Long-Term Debt
    2,797       2,272  
Deferred Income Taxes, Noncurrent
    2,188       2,110  
Other Noncurrent Liabilities
    694       630  
Total Liabilities
    7,181       6,434  
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Preferred Stock - Par Value $1.00 per share; 4 Million Shares Authorized, None Issued
    -       -  
Common Stock - Par Value $3.33 1/3 per share; 250 Million Shares Authorized; 196 Million and 195 Million Shares Issued, Respectively
    654       651  
Additional Paid in Capital
    2,446       2,385  
Accumulated Other Comprehensive Loss
    (86 )     (104 )
Treasury Stock, at Cost; 19 Million Shares
    (640 )     (624 )
Retained Earnings
    4,784       4,540  
Total Shareholders’ Equity
    7,158       6,848  
Total Liabilities and Shareholders’ Equity
  $ 14,339     $ 13,282  
 
The accompanying notes are an integral part of these financial statements.
 
Noble Energy, Inc.
Consolidated Statements of Cash Flows
(millions)
(unaudited)
 
   
Six Months Ended
June 30,
 
   
2011
   
2010
 
Cash Flows From Operating Activities
           
Net Income
  $ 308     $ 441  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
               
Depreciation, Depletion and Amortization
    456       431  
Asset Impairments
    139       -  
Dry Hole Cost
    45       54  
Deferred Income Taxes
    44       85  
Dividends (Income) from Equity Method Investees, Net
    (5 )     (2 )
Unrealized (Gain) Loss on Commodity Derivative Instruments
    160       (210 )
Gain on Divestitures
    (26 )     -  
Other Adjustments for Noncash Items Included in Income
    45       24  
Changes in Operating Assets and Liabilities
               
(Increase) in Accounts Receivable
    (32 )     (73 )
(Increase) Decrease in Other Current Assets
    (17 )     28  
Increase in Accounts Payable
    188       102  
Increase (Decrease) in Current Income Taxes Payable
    (62 )     18  
Increase (Decrease) in Other Current Liabilities
    1       (21 )
Other Operating Assets and Liabilities, Net
    (15 )     (33 )
Net Cash Provided by Operating Activities
    1,229       844  
                 
Cash Flows From Investing Activities
               
Additions to Property, Plant and Equipment
    (1,261 )     (782 )
Proceeds from Divestitures
    77       -  
Central DJ Basin Asset Acquisition
    -       (466 )
Net Cash Used in Investing Activities
    (1,184 )     (1,248 )
                 
Cash Flows From Financing Activities
               
Exercise of Stock Options
    26       28  
Excess Tax Benefits from Stock-Based Awards
    9       16  
Dividends Paid, Common Stock
    (64 )     (63 )
Purchase of Treasury Stock
    (16 )     (12 )
Proceeds from Credit Facilities
    120       1,165  
Repayment of Credit Facilities
    (470 )     (727 )
Proceeds from Issuance of Senior Long-Term Debt, Net
    836       -  
Settlement of Interest Rate Derivative Instrument
    (40 )     -  
Net Cash Provided By Financing Activities
    401       407  
Increase in Cash and Cash Equivalents
    446       3  
Cash and Cash Equivalents at Beginning of Period
    1,081       1,014  
Cash and Cash Equivalents at End of Period
  $ 1,527     $ 1,017  
 
The accompanying notes are an integral part of these financial statements.
 
 
Noble Energy, Inc.
(millions)
(unaudited)
 
   
Common
Stock
   
Additional
Paid in
Capital
   
Acumulated Other
Comprehensive
Loss
   
Treasury
Stock at
Cost
   
Retained
Earnings
   
Total
Shareholders'
Equity
 
December 31, 2010
  $ 651     $ 2,385     $ (104 )   $ (624 )   $ 4,540     $ 6,848  
Net Income
    -       -       -       -       308       308  
Stock-based Compensation
    -       29       -       -       -       29  
Exercise of Stock Options
    2       24       -       -       -       26  
Tax Benefits Related to Exercise of Stock Options
    -       9       -       -       -       9  
Restricted Stock Awards, Net
    1       (1 )     -       -       -       -  
Dividends (36 cents per share)
    -       -       -       -       (64 )     (64 )
Changes in Treasury Stock, Net
    -       -       -       (16 )     -       (16 )
Interest Rate Cash Flow Hedges
                                               
Unrealized Change in Fair Value
    -       -       15       -       -       15  
Net Change in Other
    -       -       3       -       -       3  
June 30, 2011
  $ 654     $ 2,446     $ (86 )   $ (640 )   $ 4,784     $ 7,158  
                                                 
December 31, 2009
  $ 645     $ 2,260     $ (75 )   $ (615 )   $ 3,942     $ 6,157  
Net Income
    -       -       -       -       441       441  
Stock-based Compensation
    -       27       -       -       -       27  
Exercise of Stock Options
    2       26       -       -       -       28  
Tax Benefits Related to Exercise of Stock Options
    -       16       -       -       -       16  
Restricted Stock Awards, Net
    2       (2 )     -       -       -       -  
Dividends (36 cents per share)
    -       -       -       -       (63 )     (63 )
Changes in Treasury Stock, Net
    -       -       -       (12 )     -       (12 )
Oil and Gas Cash Flow Hedges
                                               
Realized Amounts Reclassified Into Earnings
    -       -       6       -       -       6  
Interest Rate Cash Flow Hedges
                                               
Unrealized Change in Fair Value
    -               (61 )                     (61 )
Net Change in Other
    -       -       2       -       -       2  
June 30, 2010
  $ 649     $ 2,327     $ (128 )   $ (627 )   $ 4,320     $ 6,541  
 
The accompanying notes are an integral part of these financial statements.

 
Noble Energy, Inc.
(unaudited)
 
Note 1.  Organization and Nature of Operations
 
Noble Energy, Inc. (Noble Energy, we or us) is a leading independent energy company engaged in worldwide crude oil and natural gas exploration and production. Our key operating areas are onshore in the US, primarily in the Denver-Julesberg (DJ) Basin, in the deepwater Gulf of Mexico, offshore Eastern Mediterranean, and offshore West Africa.
 
Note 2.  Basis of Presentation
 
Presentation   The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the US (US GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. The accompanying consolidated financial statements at June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010 contain all normally recurring adjustments considered necessary for a fair presentation of our financial position, results of operations, cash flows and shareholders’ equity for such periods. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Certain reclassifications of amounts previously reported have been made to conform to current year presentations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
Consolidation   Our consolidated accounts include our accounts and the accounts of our wholly-owned subsidiaries.  In addition, we use the equity method of accounting for investments in entities that we do not control but over which we exert significant influence. All significant intercompany balances and transactions have been eliminated upon consolidation.
 
Estimates   The preparation of consolidated financial statements in conformity with US GAAP requires us to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
 
Statements of Operations Information   Other statements of operations information is as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
(millions)
                       
Other Revenues
                       
Electricity Sales (1)
  $ 11     $ 16     $ 32     $ 35  
Other
    -       1       1       1  
Total
  $ 11     $ 17     $ 33     $ 36  
Production Expense
                               
Lease Operating Expense
  $ 99     $ 100     $ 191     $ 188  
Production and Ad Valorem Taxes
    38       34       70       67  
Transportation Expense
    18       16       35       34  
Total
  $ 155     $ 150     $ 296     $ 289  
Other Operating (Income) Expense, Net
                               
Deepwater Gulf of Mexico Moratorium Expense (2)
  $ 1     $ 26     $ 19     $ 26  
Electricity Generation Expense (1)
    9       7       26       17  
Gain on Divestitures (3)
    (25 )     -       (26 )     -  
Other, Net
    4       8       (1 )     12  
Total
  $ (11 )   $ 41     $ 18     $ 55  
Other Non-Operating (Income) Expense, Net
                               
Deferred Compensation (Income) Expense (4)
  $ (7 )   $ (13 )   $ 3     $ (11 )
Interest Income
    (2 )     (2 )     (5 )     (4 )
Other (Income) Expense, Net
    -       2       2       2  
Total
  $ (9 )   $ (13 )   $ -     $ (13 )
 
(1)
Electricity sales include sales from the Machala power plant located in Machala, Ecuador, through May 2011. Electricity generation expense includes all operating and non-operating expenses associated with the plant, including depreciation and changes in the allowance for doubtful accounts.  See footnote (3) below.
 
(2)
Amounts relate to rig stand-by expense incurred prior to receiving permit to resume drilling activities in the deepwater Gulf of Mexico in 2011 and costs to terminate a deepwater Gulf of Mexico drilling rig contract due to the deepwater Gulf of Mexico drilling moratorium in 2010.
 
(3)
Amount relates primarily to the transfer of assets to the Ecuadorian government.  We received cash proceeds of $73 million for the transfer of our offshore Amistad field assets and Block 3 production sharing contract (PSC), which was terminated by the government of Ecuador on November 25, 2010, and the assignment of the Machala Power Electricity concession and its associated assets. Our net book value for the assets had been reduced due to previous reductions for impairments, resulting in a gain of $26 million before tax. We did not consider the property disposition material for discontinued operations presentation.
 
(4)
Amount represents increases (decreases) in the fair value of shares of our common stock held in a rabbi trust.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
Balance Sheet Information   Other balance sheet information is as follows:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
(millions)
           
Accounts Receivable, Net
           
Commodity Sales
  $ 270     $ 291  
Joint Interest Billings
    241       259  
Other
    68       33  
Allowance for Doubtful Accounts (1)
    (8 )     (27 )
Total
  $ 571     $ 556  
Other Current Assets
               
Inventories, Current
  $ 122     $ 112  
Commodity Derivative Assets, Current
    5       62  
Deferred Income Taxes, Net, Current
    33       8  
Probable Insurance Claims (2)
    25       -  
Prepaid Expenses and Other Assets, Current
    30       19  
Total
  $ 215     $ 201  
Other Noncurrent Assets
               
Equity Method Investments
  $ 292     $ 285  
Mutual Fund Investments
    118       112  
Other Assets, Noncurrent
    52       87  
Total
  $ 462     $ 484  
 
(1)
The decrease from December 31, 2010 in the allowance for doubtful accounts is due to transfer of assets to the Ecuadorian government. See footnote (3) above.
(2)
We expect to receive insurance proceeds related to the Leviathan-2 appraisal well offshore Israel.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
(millions)
           
Other Current Liabilities
           
Production and Ad Valorem Taxes
  $ 125     $ 110  
Commodity Derivative Liabilities, Current
    61       24  
Interest Rate Derivative Liability, Current
    -       63  
Income Taxes Payable
    28       90  
Asset Retirement Obligations, Current
    45       45  
Interest Payable
    55       36  
Current Portion of FPSO Lease Obligation
    21       -  
Other
    95       127  
Total
  $ 430     $ 495  
Other Noncurrent Liabilities
               
Deferred Compensation Liabilities, Noncurrent
  $ 241     $ 229  
Asset Retirement Obligations, Noncurrent
    213       208  
Accrued Benefit Costs, Noncurrent
    79       76  
Commodity Derivative Liabilities, Noncurrent
    119       51  
Other
    42       66  
Total
  $ 694     $ 630  
 
Recently Issued Accounting Standards Update   In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-04: Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 clarifies application of fair value measurement and disclosure requirements and is effective for annual periods beginning after December 15, 2011. We are currently evaluating the provisions of ASU 2011-04 and assessing the impact, if any, it may have on our financial position and results of operations.
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05: Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one continuous financial statement or two consecutive financial statements. ASU 2011-05 is effective for annual periods beginning after December 15, 2011.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
Note 3.   Asset Impairments
 
Pre-tax (non-cash) asset impairment charges were as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
(millions)
                       
East Texas (Onshore US)
  $ 116     $ -     $ 116     $ -  
Other (Primarily Onshore US)
    15       -       23       -  
Total
  $ 131     $ -     $ 139     $ -  
 
Due to field performance combined with a low natural gas price environment, we determined that the carrying amounts of certain of our onshore US developments, primarily in East Texas, were not recoverable from future cash flows and, therefore, were impaired. The assets were written down to their estimated fair values, which were determined using discounted cash flow models. See Note 6. Fair Value Measurements and Disclosures.
 
Note 4. Debt
 
Our debt consists of the following:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
Debt
   
Interest Rate
   
Debt
   
Interest Rate
 
(millions, except percentages)
                       
Credit Facility, due December 9, 2012
  $ -       -     $ 350       0.57 %
5¼% Senior Notes, due April 15, 2014
    200       5.25 %     200       5.25 %
8¼% Senior Notes, due March 1, 2019
    1,000       8.25 %     1,000       8.25 %
7¼% Notes, due October 15, 2023
    100       7.25 %     100       7.25 %
8% Senior Notes, due April 1, 2027
    250       8.00 %     250       8.00 %
6% Senior Notes, due March 1, 2041
    850       6.00 %     -       -  
7¼% Senior Debentures, due August 1, 2097
    84       7.25 %     84       7.25 %
FPSO Lease Obligation (1)
    346       -       295       -  
Total
    2,830               2,279          
Unamortized Discount
    (12 )             (7 )        
Total Debt, Net of Discount
    2,818               2,272          
Less Amounts Due Within One Year (1)
    (21 )             -          
Long-Term Debt Due After One Year
  $ 2,797             $ 2,272          
 
(1)
We have entered into an agreement to lease a floating production, storage and offloading vessel (FPSO) to be used in the development of the Aseng field, offshore Equatorial Guinea. The amount of the FPSO lease obligation is based on the discounted present value of future minimum lease payments and the percentage of construction activities completed as of the reporting dates, and therefore does not reflect future minimum lease payments. The increase in the FPSO lease obligation is a non-cash financing activity. Amounts due within one year equal the amount by which the FPSO lease obligation is expected to be reduced during the next 12 months as lease payments begin. We currently expect production to commence at year end 2011.
 
Debt Issuance   On February 18, 2011, we closed an offering of $850 million senior unsecured notes receiving net proceeds of $836 million, after deducting discount and underwriting fees. The notes are due March 1, 2041, and pay interest semi-annually at 6%. Total debt issuance costs of approximately $9 million were incurred and are being amortized to expense over the term of the notes. Approximately $470 million of the net proceeds were used to repay outstanding indebtedness under our revolving credit facility and the balance of the proceeds will be used for general corporate purposes. The notes are senior unsecured debt and rank pari passu with any of our other senior unsecured indebtedness with respect to the payment of both principal and interest.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
Annual Debt Maturities and FPSO Lease Payments   Annual maturities of outstanding debt and estimated annual FPSO lease payments are as follows:

   
Debt
Principal
Payments
   
FPSO
Lease
Payments
 
(millions)
           
June 30, 2011
           
2011
  $ -     $ -  
2012
    -       72  
2013
    -       72  
2014
    200       72  
2015
    -       72  
Thereafter
    2,284       209  
Total
  $ 2,484     $ 497  
 
Note 5.  Derivative Instruments and Hedging Activities
 
Objective and Strategies for Using Derivative Instruments   In order to reduce commodity price uncertainty and enhance the predictability of cash flows relating to the marketing of our crude oil and natural gas, we enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production. The derivative instruments we use include variable to fixed price commodity swaps, two-way and three-way collars and basis swaps.
 
The fixed price swap, two-way collar, and basis swap contracts entitle us (floating price payor) to receive settlement from the counterparty (fixed price payor) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable for each calculation period is less than the fixed strike price or floor price. We would pay the counterparty if the settlement price for the scheduled trading days applicable for each calculation period is more than the fixed strike price or ceiling price. The amount payable by us, if the floating price is above the fixed or ceiling price, is the product of the notional quantity per calculation period and the excess of the floating price over the fixed or ceiling price in respect of each calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional quantity per calculation period and the excess of the fixed or floor price over the floating price in respect of each calculation period.
 
A three-way collar consists of a two-way collar contract combined with a put option contract sold by us with a strike price below the floor price of the two-way collar.  We receive price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, we receive the cash market price plus the delta between the two put option strike prices. This type of instrument allows us to capture more value in a rising commodity price environment, but limits our benefits in a downward commodity price environment.
 
We also enter into forward contracts or swap agreements to hedge exposure to interest rate risk.
 
While these instruments mitigate the cash flow risk of future reductions in commodity prices or increases in interest rates, they may also curtail benefits from future increases in commodity prices or decreases in interest rates.
 
See Note 6. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our derivative instruments.
 
Counterparty Credit Risk   Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently with a diversified group of highly rated major banks or market participants, and we control our level of financial exposure. Our commodity derivative contracts are executed under master agreements which allow us, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If we choose to elect early termination, all asset and liability positions with the defaulting counterparty would be net settled at the time of election.
 
We monitor the creditworthiness of our counterparties. However, we are not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk. Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices or higher interest rates, and could incur a loss.
 
Interest Rate Derivative Instrument   In January 2010, we entered into an interest rate forward starting swap to effectively fix the cash flows related to interest payments on our anticipated debt issuance. On February 15, 2011 we settled the interest rate swap, which had a net liability position of $40 million. Approximately $26 million, net of tax, was recorded in accumulated other comprehensive loss (AOCL) and is being reclassified to interest expense over the term of the notes. The ineffective portion of the interest rate swap was de minimis.   See Note 4. Debt.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
Unsettled Derivative Instruments
As of June 30, 2011, we had entered into the following crude oil derivative instruments:
 
             
Swaps
   
Collars
 
Period
Type of Contract
Index
 
Bbls Per
Day
   
Weighted
Average
Fixed
Price
   
Weighted
Average
Short Put
Price
   
Weighted
Average
Floor
Price
   
Weighted
Average
Ceiling
Price
 
Instruments Entered Into as of June 30, 2011
                           
2011
Swaps
    NYMEX WTI (1)
    5,000     $ 85.52     $ -     $ -     $ -  
2011
Two-Way Collars
 NYMEX WTI
    13,000       -       -       80.15       94.63  
2011
Three-Way Collars
 NYMEX WTI
    12,000       -       58.33       78.33       100.71  
2012
Swaps
 NYMEX WTI
    5,000       91.84       -       -       -  
2012
Swaps
Dated Brent
    8,000       89.06       -       -       -  
2012
Three-Way Collars
 NYMEX WTI
    23,000       -       61.09       83.04       101.66  
2012
Three-Way Collars
 Dated Brent
    3,000       -       70.00       95.83       105.00  
2013
Swaps
 Dated Brent
    3,000       98.03       -       -       -  
2013
Three-Way Collars
 NYMEX WTI
    5,000       -       65.00       85.00       113.63  
2013
Three-Way Collars
 Dated Brent
    12,000       -       75.83       97.50       125.93  
 
(1)
West Texas Intermediate
 
As of June 30, 2011, we had entered into the following natural gas derivative instruments:
 
             
Swaps
   
Collars
 
Period
Type of Contract
Index
 
MMBtu
Per Day
   
Weighted
Average
Fixed
Price
   
Weighted
Average
Short Put
Price
   
Weighted
Average
Floor
Price
   
Weighted
Average
Ceiling
Price
 
Instruments Entered Into as of June 30, 2011
                           
2011
Swaps
   NYMEX HH (1)
    25,000     $ 6.41     $ -     $ -     $ -  
2011
Two-Way Collars
NYMEX HH
    140,000       -       -       5.95       6.82  
2011
Three-Way Collars
NYMEX HH
    50,000       -       4.00       5.00       6.70  
2012
Swaps
NYMEX HH
    30,000       5.10       -       -       -  
2012
Three-Way Collars
NYMEX HH
    110,000       -       4.44       5.25       6.66  
2013
Swaps
NYMEX HH
    30,000       5.25       -       -       -  
2013
Three-Way Collars
NYMEX HH
    50,000       -       4.00       5.25       5.59  
 
(1)
Henry Hub
 
As of June 30, 2011, we had entered into the following natural gas basis swaps:
 
Period
Index
Index Less Differential
MMBtu Per Day
 
Weighted Average
Differential
2011
IFERC CIG (1)
NYMEX HH
140,000
  $
(0.70
)
2012
IFERC CIG
NYMEX HH
150,000
   
              (0.52
 
(1)
Colorado Interstate Gas – Northern System
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
Fair Value Amounts and Gains and Losses on Derivative Instruments   The fair values of derivative instruments in our consolidated balance sheets were as follows:
 
Fair Value of Derivative Instruments
 
   
Asset Derivative Instruments
 
Liability Derivative Instruments
 
   
June 30,
 
December 31,
 
June 30,
 
December 31,
 
   
2011
 
2010
 
2011
 
2010
 
   
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
(millions)
                                 
Commodity Derivative Instruments
(Not Designated as Hedging Instruments)
 
Current Assets
 
$
5
 
Current Assets
 
$
62
 
Current Liabilities
 
$
61
 
Current Liabilities
 
$
24
 
   
Noncurrent Assets
   
-
 
Noncurrent Assets
   
-
 
Noncurrent Liabilities
   
119
 
Noncurrent Liabilities
   
51
 
                                           
Interest Rate Derivative Instruments
(Designated as Hedging Instruments)
 
Current Assets
   
-
 
Current Assets
   
-
 
Current Liabilities
   
-
 
Current Liabilities
   
63
 
Total
     
$
5
     
$
62
     
$
180
     
$
138
 
 
The effect of derivative instruments on our consolidated statements of operations was as follows:
 
Commodity Derivative Instruments Not Designated as Hedging Instruments
Amount of (Gain) Loss on Derivative Instruments Recognized in Income
 
   
Three Months Ended June 30,
 
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
(millions)
                       
Realized Mark-to-Market Gain
  $ (1 )   $ (33 )   $ (17 )   $ (32 )
Unrealized Mark-to-Market (Gain) Loss
    (142 )     (63 )     160       (210 )
Total (Gain) Loss on Commodity Derivative Instruments
  $ (143 )   $ (96 )   $ 143     $ (242 )
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
Derivative Instruments in Cash Flow Hedging Relationships
 
 
Amount of (Gain) Loss
on Derivative
Instruments Recognized
in Other Comprehensive
(Income) Loss
   
Amount of (Gain) Loss
on Derivative
Instruments
Reclassified from
Accumulated Other
Comprehensive Loss
 
   
2011
   
2010
   
2011
   
2010
 
(millions)
                   
Three Months Ended June 30,
           
Commodity Derivative Instruments in Previously Designated Cash Flow Hedging Relationships (1)
                       
Crude Oil Derivative Instruments
  $ -     $ -     $ -     $ 4  
Natural Gas Derivative Instruments
    -       -       -       -  
                                 
Interest Rate Derivative Instruments in Cash Flow Hedging Relationships
    -       83       -       -  
Total
  $ -     $ 83     $ -     $ 4  
Six Months Ended June 30,
               
Commodity Derivative Instruments in Previously Designated Cash Flow Hedging Relationships (1)
                               
Crude Oil Derivative Instruments
  $ -     $ -     $ -     $ 9  
Natural Gas Derivative Instruments
    -       -       -       1  
                                 
Interest Rate Derivative Instruments in Cash Flow Hedging Relationships
    (23     94       1       -  
Total
  $ (23   $ 94     $ 1     $ 10  
 
(1)
Includes effect of commodity derivative instruments previously accounted for as cash flow hedges. All net derivative gains and losses that were deferred in AOCL as a result of previous cash flow hedge accounting, had been reclassified to earnings by December 31, 2010.
 
AOCL at June 30, 2011 included deferred losses of $27 million, net of tax, related to interest rate derivative instruments. This amount will be reclassified to earnings as an adjustment to interest expense over the terms of our senior notes due April 2014 and March 2041.  Approximately $2 million of deferred losses (net of tax) will be reclassified to earnings during the next 12 months and will be recorded as an increase in interest expense.
 
Note 6.  Fair Value Measurements and Disclosures
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Certain assets and liabilities are measured at fair value on a recurring basis in our consolidated balance sheets.  The following methods and assumptions were used to estimate the fair values:  
 
Cash, Cash Equivalents, Accounts Receivable and Accounts Payable   The carrying amounts approximate fair value due to the short-term nature or maturity of the instruments. 
 
Mutual Fund Investments   Our mutual fund investments, which primarily include assets held in a rabbi trust, consist of various publicly-traded mutual funds that include investments ranging from equities to money market instruments. The fair values are based on quoted market prices for identical assets.
 
Commodity Derivative Instruments   Our commodity derivative instruments consist of variable to fixed price commodity swaps, two-way and three-way collars and basis swaps. We estimate the fair values of these instruments based on published forward commodity price curves as of the date of the estimate. The discount rate used in the discounted cash flow projections is based on published LIBOR rates, Eurodollar futures rates and interest swap rates. The fair values of commodity derivative instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of commodity derivative instruments in a liability position include a measure of our own nonperformance risk, each based on the current published credit default swap rates. In addition, for collars, we estimate the option values of the put options sold (for three-way collars) and the contract floors and ceilings (for two-way and three-way collars) using an option pricing model which takes into account market volatility, market prices and contract terms. See Note 5. Derivative Instruments and Hedging Activities.
 
Interest Rate Derivative Instrument   We estimated the fair value of our forward starting swap based on published interest rate yield curves as of the date of the estimate. The fair values of interest rate derivative instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of interest rate derivative instruments in a liability position include a measure of our own nonperformance risk, each based on the current published credit default swap rates. See Note 5. Derivative Instruments and Hedging Activities.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
Deferred Compensation Liability   The value is dependent upon the fair values of mutual fund investments and shares of our common stock held in a rabbi trust. See Mutual Fund Investments above.
 
Measurement information for assets and liabilities that are measured at fair value on a recurring basis was as follows:
 
   
Fair Value Measurements Using
             
   
Quoted Prices in
Active Markets
(Level 1) (1)
   
Significant Other
Observable Inputs
(Level 2)